Automated Appraisals and their Risk

The Appraisal Industry is constantly changing and adapting to the current times. Like it or not, Automated Valuation Models and other alternative products are being used. These alternatives are designed to help, but there can also be risks involved. We sat down with Lima Ekram, Assistant Vice President Analyst with Moody’s Investors Service, to further discuss her paper, “Use of Appraisal Alternatives is Likely to Grow, Posing New Risks.”

Buzz: Lima, we just read your white paper entitled “Use of Appraisal Alternatives is Likely to Grow, Posing New Risks.” Some of the most pressing questions: Are Automated Valuation Models (AVMs) an existential threat for the future of the appraisal profession?

Moody’s: That’s a question for others to answer. At Moody’s, our focus is on changes that can affect the credit quality of the bonds we rate. What we have said in our published reports is that the use of (AVMs) and hybrid appraisals to value residential mortgage properties could introduce new risk to Residential Mortgage Backed Securitizations (RMBS) such as systemic model and data errors for AVMs and use of poorer quality information for hybrid appraisals. However, RMBS could also benefit from AVMs, which analyze large datasets from different time periods, geographies, and remove much human bias from the valuation process.

Buzz: Is the RMBS world aware of the risks associated with the gap, if any, between value and price? You alluded to this in your paper but very subtly.

Moody’s: What I can tell you is that we have been working hard to raise awareness about the potential for elevated credit risks of hybrid appraisals and AVMs. We’ve published two articles, I have spoken at a number of conferences, and we have had a lot of conversations with RMBS market participants about those risks and potential mitigants. In all these interactions, our key points have been:

1.) Any systemic error in an AVM can have far-reaching effects, undermining the valuations of all loans calculated using that model, while an underperforming appraiser would skew only a small share of loans in a securitization.

2.) While systemic errors were also found in the use of traditional appraisals during the crisis, root causes leading to inaccurate appraisals, such as a lack of appraisal independence, have been addressed through legislation, education, improved quality control, and the emergence of appraisal management companies.

3.) AVMs have not undergone stressed economic cycles and thus the need for corrective action, if any, is still unknown. At the same time, RMBS could also benefit from AVMs, which analyze large datasets from different time periods, geographies, and remove much human bias from the valuation process.

Buzz: Do you see any products under development that melds the best of “man and machine”?

Moody’s: Our research reports provide some comparisons of the various appraisal methods, in terms of their impact on the credit quality of any RMBS backed by loans subject to those types of methods.

Thank you for answering our questions! Have any comments or would you like to submit an article of your own? Email comments@appraisalbuzz.com for more information.